Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Oil Prices: Global Markets Favor Brent Crude, Refineries Are Set to Advance

Commodities / Crude Oil Oct 29, 2012 - 08:43 AM GMT

By: Money_Morning

Commodities

Best Financial Markets Analysis ArticleDr. Kent Moors writes: Brent and WTI crude oil prices have been on a downward trajectory. Recently Brent had declined for seven consecutive trading sessions while WTI had been down for five.

Given the importance these benchmarks have in pricing crude worldwide, it is useful to review what they are before talking about their widening spreads.


Brent and WTI (West Texas Intermediate) are the two principal crude oil price benchmarks of global trade. Brent is set in London, WTI on the NYMEX in New York.

As I have observed in Money Morning on a number of occasions, neither benchmark actually reflects the quality of the oil traded worldwide.

On average, 85% of the oil in the international market on any given day is more sour (having a higher sulfur content) than either of these benchmarks. That means the actual trades are done at a discount to the price of one or the other of these standards.

Both are denominated in dollars, the currency in which virtually all oil consignments internationally are priced. That certainly is one primary reason for their continued use.

In addition, the daily liquidity of futures contracts traded in the world's two largest investment locations is yet a reason for their use.

Finally, with more than 200 benchmark rates for crude existing throughout the world, most having insufficient volume to constitute a basis for oil prices, there needs to be yardsticks to determine pricing differentials and swaps.

Those common yardsticks should be the most liquid and highest volume trading contracts available.

Brent and WTI fit the bill in all of these aspects, despite the fact they don't reflect the lower quality of most oil traded.

Oil Prices: Global Markets Favor Brent Crude
Still, the most interesting development since mid-August 2010 has been the following: despite representing lower quality oil, Brent has been trading at a premium to WTI.

Of the two, Brent has more sulfur content. That should result in a lower price rather than higher comparative price.

Actual trading conditions prompt a spread in favor of Brent for several reasons.

In addition to Europe experiencing a more immediate reaction to current geopolitical pressure, there are two primary issues at hand.

First, Brent is used as the basis for more actual daily trades worldwide than WTI is. Brent is the preferred standard for determining discounted prices in many global markets where even lower quality volume is offered.

Second, Brent represents a crude standard that does not have significant supply glut concerns. WTI, on the other hand, may be traded in New York, but the daily spot price is set at Cushing, Okla.

Cushing is the main pipeline hub in the United States, but the city has experienced a surplus backlog for some time. New pipeline projects and the construction of additional storage capacity are addressing this problem.

But until the network to move oil from Cushing improves, the glut will continue to suppress WTI pricing

The price difference or spread between Brent and WTI is an indicator of overall global oil market conditions. It widened lately, closing last week at the highest difference since mid-October of last year.

The nominal difference in price (the one determined by simply subtracting the WTI rate from Brent) was $23.32 a barrel. The better way to express the spread, and my preferred approach, is to treat that difference as a percentage of WTI.

By using this figure, we can obtain a thumbnail indicator of the real effect the spread has on prices in the U.S.

Yesterday, that spread rate hit 27.1%.

Refineries Are Set to Advance
The consequences have two results that energy investors need to consider.

The first is the obvious one. Given its more dominant use as a global benchmark, a higher Brent price translates into higher import pricing in the American market.

The advent of increasing U.S. domestic unconventional production (shale and tight oil) is resulting in less dependence on imports. Five years ago, the U.S. imported nearly two-thirds of its daily oil consumption. By the end of 2012, that figure may fall to less than 50%.

This is a remarkable transformation.

In a similar development, U.S. production will register this year at a daily level higher than at any point in more than a decade. This has led to much discussion about self-sufficiency being a realistic future goal.

And it is possible.

A few decades down the road, if current projections of unconventional reserves are accurate, the U.S. will need to import only about 30% of daily requirements. Virtually all of that would be provided by the huge Canadian oil sands deposits.

But for the next 20 years or so, those higher Brent oil prices will affect U.S. prices, even if we rely on fewer imports. Even after that, given the global nature of oil pricing, the spread will affect the American market.

The second major result of the Brent premium to WTI is less apparent.

Still, it has a bigger impact on U.S. energy investment prospects. When the spread increases, so do margins (and thereby profitability) at American-based refineries.

A spike in the spread often leads to a decline in refinery share prices at the outset, but quickly prompts a recovery and improvement thereafter. This is because the single biggest cost component in refining remains crude oil.

Still, if a refinery can balance consignment sourcing and stockpiles supply in advance of the spike, a later increase in Brent over WTI allows an improved margin. This is why increasing inventory figures in weekly EIA reports need to be read with care. They may have less to say about retail demand levels and more to say about the massaging of refinery margins.

One conclusion, however, is beyond dispute.

The rise in the spread between Brent and WTI provides an element investors need to watch.

But it is also an indicator of where to profit when investing.

Source :http://moneymorning.com/2012/10/29/oil-prices-as-the-wti-brent-spread-widens-refineries-are-set-to-advance/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules